The AIG bailout is one of the largest redistributions of wealth from ordinary taxpayers to bigwig bankers in history, one in which current Treasury Secretary Timothy Geithner played a key role. Newly uncovered emails reveal that Treasury Secretary Timothy Geithner's New York Federal Reserve office urged AIG to conceal key information about the bailout from the Securities and Exchange Commission.
If Geithner was involved in those decisions, he could face charges of securities fraud. As John Nichols explains for The Nation, the quality of Geithner's judgment is no longer in question-we already knew he committed plenty of errors while negotiating the AIG bailout as president of the New York Federal Reserve. The question now is whether Geithner needs to be prosecuted for misleading federal regulators.
AIG bet on the housing market with credit default swaps, a new form of financial derivative that helped the company score big profits during the housing boom. But when the market tanked, the company couldn't cover its losses. AIG's housing market gambles were completed with help from some of the largest banks in the world, including Goldman Sachs, Merrill Lynch, Bank of America, and Citigroup. If AIG had filed for bankruptcy in September of that year, those banks would have been required to accept much lower payouts on those bets-as little as 10% of their face value.
Instead, when the government swooped in to save AIG, the banks ended up with amazing deals. As a chief negotiator in the AIG bailout, Geithner allowed Goldman and others to receive full payout at 100 cents on the dollar. That meant U.S. tax dollars were going to the banks with no strings attached. But Geithner refused to tell the public which banks were benefiting from the bailout for almost six months. He finally relented when the AIG bonus outrage boiled over in March.
Last week, we learned the most damaging development yet: Geithner's New York Fed urged AIG to keep the SEC in the dark about its sweetheart deals for the banks. Withholding key information from the SEC can be a criminal offense, and if Geithner was involved in the push to mislead the SEC, he must be held accountable.
For now, the Obama administration is standing by Geithner, saying that the decision to pressure AIG against cooperating with the SEC "did not rise to his level at the Fed" last Friday. But as Mike Lillis notes for The Washington Independent, that explanation strains credulity:
The federal government had recently bailed out AIG to the tune of $180 billion; AIG was funneling that cash to other (already bailed out) Wall Street giants; the New York Fed was telling AIG not to disclose those payments; and that decision didn't rise to the level of the Fed chairman?
Lately, the government hasn't had a very good record on prosecuting financial crime. Prosecutors wouldn't have uncovered a massive tax evasion scheme at Swiss banking giant UBS without the help of whistleblower Bradley Birkenfeld. And the tax fraud was indeed massive-the Justice Department believes that UBS illegally helped shield over 19,000 wealthy clients from paying taxes.
But, as Amy Goodman reveals for Democracy Now!, in return for uncovering the biggest tax fraud in history, the Justice Department has successfully pushed to have Birkenfeld jailed for more than three years. By contrast, almost everyone involved in the scam is getting off with fines, probation, or less. What signal do you think this sends to other potential whistleblowers?
The housing boom encouraged banks to pour money into speculative investments outside the traditional mortgage market, especially by making loans to property developers to build high-end condominiums. When the housing bubble burst, it became clear that there were far more fancy condos than anybody wanted. Today, most economists expect the loans that financed these developments to prove nearly worthless.
As Alyssa Katz details for The American Prospect, scores of those buildings are now nearly vacant in New York City alone. In order to create these useless towers, developers cleared the land by forcing out tenants in affordable housing complexes, and shut down productive businesses. If these spaces are to be used productively-say, for affordable rental housing-banks and developers need to acknowledge that their market has tanked, accept their losses and move on.
Instead, Katz notes, federal regulators are letting banks apply very optimistic accounting values to these commercial real estate projects. This accounting creates illusory short-term profits for banks and eliminates incentives to let the land go to socially useful enterprises. If regulators don't force banks to get serious about their commercial real estate losses, the government will effectively be subsidizing a rash of useless eyesores, allowing neighborhoods to decay in the process.
Subprime shenanigans from AIG, UBS and other banks helped tank the global economy. We're still feeling the job fallout from a financial crisis that banks triggered over two years ago. Last week, the government reported that the economy lost 85,000 jobs in December, while the unemployment rate held even at 10%. David Moberg explains why we desperately need the Senate to approve a robust jobs bill in a blog for Working In These Times. A $174 billion package passed the House last month, but it's a pittance compared to what the government has pledged to save Wall Street.
So how did we get here-saving the crooked jerks who created the mess while leaving everyone else out to dry? Kevin Drum's story in Mother Jones on the bank lobby offers critical insight into the operations of the U.S. democratic process, and also stands up as one of a handful of investigative journalism masterpieces that have stemmed from the financial crisis. In the last dozen years, elite financiers have secured government approval to shoulder greater risks and pay bigger bonuses, despite a series of near-catastrophic financial market failures. Drum details the financial industry's pervasive influence over lawmakers in Congress, key policymakers at the Federal Reserve and federal regulators in other agencies, influence often purchased outright with campaign contributions and massive lobbying efforts.
These days, the money still talks in American government. But the true economic coup is not financial. It's ideological: Bankers have convinced leaders of both political parties that what's good for Wall Street is always good for America, even if the cost of boosting the bottom line involves dismantling productive firms, ravaging neighborhoods with foreclosures or scamming poor people with massive overdraft fees.
"...There's more to the finance lobby than just money and political influence," Drum writes. "Their real power lies in the fact that they've so thoroughly changed our collective attitude toward financial regulation that sometimes they barely need to lobby in the traditional sense at all."
This is precisely how we got stuck with banker apologists like Geithner, a Justice Department that punishes whistleblowers while letting corporate crooks go free, and why we're allowing neighborhoods to rot away for no reason. We have to demand more from our government, regardless of which party is in power. If we don't, we'll get stuck with the same save-Wall-Street-first policies forever, regardless of the consequences for society.
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Wells Fargo is a roadblock to economic recovery. That's what members of the United Electrical, Radio, and Machine Workers (UE) are claiming, as they literally blocked a busy Rock Island, Illinois intersection late last week to protest Wells Fargo's decision to cut off credit to the Quad City Die Casting factory.
100 Quad City factory employees risk losing their jobs if Wells Fargo doesn't extend tens of thousands of dollars in credit to continue day-to-day operating costs. So why won't Wells Fargo use some of its $25 billion in bailout funds to keep this factory afloat, particularly when the Illinois-Iowa Quad Cities region is losing $6.1 million in wages and tax revenue annually? According to UE organizer Leah Fried, "[Wells Fargo] want[s] to get out from under the TARP money because they want to get out from the scrutiny. They're hoarding." Wells Fargo has even gone so far as to prevent the company from paying the wages and benefits owed to its employees, which prompted UE to file charges with the National Labor Relations Board last week.
Across the country, we're seeing more and more protests this one. As journalist/labor activist Mike Elk recently noted, these public demonstrations are highly effective ways of bringing national attention to the bailed out banks that are cutting off credit and have done pathetically little to jump-start our ailing economy. We saw this last December, when laid-off UE workers held sit-ins at Republic Windows and Doors in Chicago because Bank of America and JPMorgan Chase wouldn't fork over credit for the company to pay severance.
by Zach Carter, Media Consortium MediaWire Blogger
Now that Treasury Secretary Timothy Geithner isn't going to impose pay restrictions on bailed out Wall Street executives, it's critical to remember that severe economic inequality was a major factor in the financial meltdown. Our tax code funnels money into the hands of our wealthiest citizens, which means that our financial system protects the interests of the affluent—not the the average citizen. The broad divergence between our core democratic values and the existing U.S. economic structure must become part of the public debate over financial reform.
There is an overwhelming sense in America that the Bush administration, in tandem with Wall Street, is the main source of blame for the current financial crisis that we face. A recent CBS poll on the subject of blame for the crisis found that 54% of the country entirely blamed one of those two sources, and that an additional 21% partially blamed them. By contrast, only 2% blamed the Obama administration entirely, and another 21% blamed the Obama administration partially.
The blame for the crisis appears entirely accurate, and I see no reason to dispute it. However, if a new, lengthy, must-read, New York Times article on Treasury Secretary Timothy Geithner is to be believed, Geithner is practically the sole architect of the bailout and overall response to the financial crisis. At every turn, from the actions of the reserve banks to the creation of the various TARP / TALF / PIPPP programs, it was Geithner's decision to offer enormous, no-strings attached loans to the failing financial institutions the caused the crisis:
Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation's economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.
Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation's most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.
The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars. (...)
But in the 10 months since then, the government has in many ways embraced his blue-sky prescription. Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation's financiers from their own mistakes.
The long and short of the article is that the bailout plan is almost entirely Geithner's construction, even back in 2007 and 2008 when the Bush administration was still in office. This means that even though the Obama administration did not cause the financial crisis, by hiring Geithner as Treasury Secretary, they have placed themselves entirely on the hook for the bailout itself.
Whether the bailout succeeds or fails (I believe fails is more likely), and whether it ends up transferring hundreds of billions in losses from Wall Street to the public sector (which, once again, seems highly likely), by putting the person who designed the bailout as Treasury Secretary, President Obama made this bailout his own. There is no way to shift responsibility for it. As such, the Obama administration has, in a real sense, taken on a level of risk in the political sector that the bailout has put taxpayers are on the hook for in the financial sector. If the bailout does not work, and the economy does not recover, in three years time Republicans will have a legitimate opening for the Presidency, so long as they nominate someone who opposed the bailout in the first place.
Not only do I feel extremely uncomfortable with the public being on the hook for Wall Street's financial losses, I feel very uncomfortable with Democrats being on the hook with this bailout plan. Our post-2010 electoral future is directly tied to its success or failure. That sucks pretty bad, but it does leave me hoping that, somehow, the Geithner plan will actually work. As a party, our continued ability to govern depends on it.
BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?
WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.
BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.
This is the great truth that cannot be spoken: what we're seeing here is massive elite criminality. And it, of course, the natural result of 30+ years of virtualy unfettered elite rule. This is what the Democrats ought to be standing militantly against. If they were, the GOP would dissolve within a few election cycles, as the Federalists did during the Monroe Presidency. But, of course, the Democrats are almost as deeply aligned with the criminals are the Republicans are--and Giethner, Summers and Rubin are the proof of the pudding. This is not a question of right vs. left. It's a question of left vs. wrong. Because calling a banker a criminal makes you a Commie, right? Even if it's true.
by Zach Carter, Media Consortium MediaWire Blogger
Treasury Secretary Timothy Geithner rolled out his new Wall Street bailout plan on Monday and the progressive verdict is already in: This bailout doesn't look much better than the last one. In fact, Geithner's latest plan isn't much different from several other flawed proposals policymakers have floated over the past year. At its core, Geithner's program is just another attempt buy up "toxic assets" from banks at inflated prices.
I keep reading Secretary Geithner's speech today. The phrase that keeps going over and over in my head is that "we are letting it happen again before we prevent it from happening again."
Geithner identifies the financial crisis as being "caused by banks taking too much risk." In another wording, he characterizes it as a series of "bad lending decisions" made by banks. The bad lending decisions that resulted in this excessive risk were caused by "The lack of an appropriate and modern regulatory regime and resolution authority."
Overall, Geithner's argument is that this financial crisis could have been avoided if there was a better regulatory system, and that we will need to revamp financial regulations to avoid another crisis caused by bad lending decisions. That certainly rings true. I can't really argue with that assessment.
As such, the second to last paragraph in the speech sums up this fear (emphasis mine):
But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms.
While Geithner's assessment of the problem rings true, his look to the future at the end of the speech strikes me as backward. If the lack of a "modern regulatory regime and resolution authority" both caused this crisis and will cause future crises, then shouldn't we construct that new regulatory regime first, and then hand money out to the private sector second? Otherwise, according to Geithner's own logic, aren't we just handing out more money to the people who caused the crisis, without any guarantees they won't just do the same thing again?
Right now, it's becoming particularly apparent that there's a real danger of Obama's Administration going really wrong. I've long been hopeful that the historical logic Mike Lux writes about in his book will take hold, and that Obama will be forced to move to the left, to institute progressive reforms, as has happened at crucial times before. But what if he doesn't? What if his current support for Timothy Geithner and his misbegotten plan is the harbinger of all that's to come? How bad could it get?
A lot of railing against the evil Fed and the banking class (which will be conflated with American Jews);
A lot of talk about we shouldn't waste money on "wasteful" and "bloated" government social programs, and how we should instead give it directly to the churches so they can help the poor like Jesus told them to do;
A little dose of the Dolchstosslegende about how the Democrats pussied out and retreated from Iraq and Afghanistan when those wars could have been won, + a sacred vow to go into the Middle East, wipe out all those "heathens," and take back the oil that belongs to the American people by right;
A lot of raving against Muslims (for "being terrorists"), immigrants (for "stealing jobs from honest, decent Americans"), homosexuals (for their "decadent lifestyles"), and liberals (for "hating America");
Bake for four years or so, and you've got yourself an America run by religious fanatics, locked in holy (thermonuclear) wars abroad while engaging in ethnic cleansing at home.
I don't think that's anywhere near guaranteed if Obama fails. But I certainly think it's a distinct possibility. And in responding to limpidglass, Master Jack sketched out a different sort of cost--the opportunity cost of what's potentially going to be wasted if we continue in this way:
From the four five and counting active quick hits on this, I think we need to have a thread on "the plan" from the Obama Administration to address the banking crisis leaked to the media last night. Here's a round up of reactions.
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy.
Jbearlaw in quick hits points to an article by David Corn and Jonathan Stein at Mother Jones as "More Evidence Geithner in Wall Street's Pocket", but I don't quite think that's the right metaphor. Nor is Geithner necessarily the one to focus on. Rather, I come away from the article feeling, more than ever, that the entire Obama Administration is embedded in Wall Street.
It's not a question of doing Wall Street's bidding, because they won't, necessarily. Rather, it's a question of thinking Wall Street's thoughts, of having absorbed them by osmosis for so long, and through so many channels that even when they seek to oppose Wall Street on some issue or another, the form it takes is virtually indistinguishable from agreement to anyone who's not an insider themselves. But let me run it down on the flip, and see what you think for yourselves.
Here are the four main questions about Larry Summers and Timothy Geithner's role in the bonuses scandal:
When did they know about the bonuses? The current line from the administration is that Geithner did not know about the bonuses until last week. However, according to the Washington Post, attorneys working for the Federal Reserve Bank knew about the bonuses for months. If Fed lawyers were working on this for months, was Timothy Geithner, former head of the Federal Reserve Bank of New York, current Secretary of the Treasury, and negotiator of all three AIG bailouts really unaware of this until last week? Really? If so, who kept this information from him?
Why weren't the bonuses disclosed before the Senate voted to release the second half of bailout funding? Clearly, given that Federal Reserve lawyers were working on blocking the bonuses for months, some government officials knew about the bonuses before the Senate voted on January 15th to release the second $350 billion of TARP funding. Given the current furor, I think it goes without saying that public knowledge of the bonuses in January could have altered the outcome of that vote, or at least convinced Senator Banking Chair Chris Dodd to take up the TARP Reform Act passed by the House. Given that, three days before the Senate vote, Larry Summers sent a letter to Congress urging them to release the TARP funding without any new legislative requirements, if he knew about these bonuses back in January that would be a pretty severe case of denying legislators relevant evidence before a critical vote. Even beyond Geithner and Summers, anyone in the government who knew about this but did not bother to tell either the Senate or the media tampered with that vote.
Why were Geithner and Summers working as recently as last month to water down legislation that would have blocked executive bonuses? If Geithner and Summers are both so outraged by the bonuses given to employees of financial institutions receiving bailout money, then why were they working, as recently as last month, to water down legislation that would have retroactively blocked such bonuses? When Senator Chris Dodd had included legislation retroactively blocking bonuses for employees of financial institutions receiving bailout money, he received a personal call from both Larry Summers and Timothy Geithner asking him to drop the retroactive aspect of that legislation. Eventually, Geithner and Summers prevailed, as the legislation was watered down significantly.
Why did Geithner and Summers both say there was no way for the government to get the bonuses back, when there obviously is? Over the weekend, Geithner and Summers both publicly declared that there was no way for the government to force the individuals who are scheduled to receive these bonuses to pay those bonuses back to the government. However, Summers and Geithner were obviously wrong. Over the last two days, dozens of Democratic member of Congress have either introduced, co-sponsored, or set a deadline for introducing legislation that will place a 100% surtax on these bonuses, thus forcing the recipients of these bonuses to pay them back to the government. Given that there was a fairly obvious solution to get the bonuses back, why did Geithner and Summers, who are supposed to be such leading thinkers on finance, declare in public that there was no solution? As I asked last night, are they lacking in imagination, or are they protecting someone?
These are the questions that still have not been adequately answered about the role Geithner and Summers played in the AIG bonus scandal. Journalists and activists of all stripes need to keep asking them. This is not a small issue, since the same people who are being given these bonuses are being entrusted by Timothy Geithner with hundreds of billions of dollars of taxpayer money to get the economy back on track. If we can't trust the person giving the money, or the people receiving it, then they need to be fired and replaced with new people who will do a better job.
Geithner claims that over a course of months, he couldn't figure out a way to stop the AIG bonuses; a period of time during which he told Congress that they didn't need to put the force of federal law behind executive compensation restraint. Union employees' contracts don't matter, banking employees' contracts supercede the federal government's 80 percent ownership stake in AIG and the expressed will of the President and the legislature. While mark-to-market regulations on the financial industry were eased today, the automakers had to prove themselves with detailed business plans.
So Congress ends up demanding in the law that the unemployed be accountable for looking for work, but Bush's Treasury guy gets off with a pledge and a sternly worded letter. Help for homeowners and single parents on food stamps needs to be vetted so that aid only goes to the deserving, but millions in taxpayer-funded bonuses can be given without strings to the very people who blew up the entire world financial system.
There are only two explanations for this persistent pattern of screwing working class interests. One is that the most politically connected people in the country know less about what's going on than we do. The other is that things are unfolding as they want and expect, but they'll pretend to be outraged if that seems necessary.
And we, we are supposed to believe the accident of naivete option. Right. And that bruised up neighbor who lives in the house with all the screaming fights, she falls down the stairs a lot.
The details of AIG's bonuses are pretty appalling: 73 employees took home at least $1 million, while one person got a whopping $6.4 million. What's more, NY Attorney General Andrew Cuomo proved AIG's excuse about needing these "retention" bonuses to keep employees at its Financial Products subsidiary was (believe it or not) complete and utter bullshit, since 11 of these bonus recipients have since left the company.
Now, Congress can try to rectify this situation by putting a 100% surtax on these bonuses. They can impose stricter limitations on the subsequent $30 billion bailout for AIG--if you can believe AIG is even getting another bailout! Still, this news is too infuriating to just sit back and wait for Congress to check Wall Street's ridiculous hubris.
This Thursday, March 19, SEIU and a slew of other organizations will be holding demonstrations at bailed-out banks and corporations in over 100 cities across the country, demanding fiscal repsonsibility. Sign up at TakeBacktheEconomy.org and join a demonstration in your community for a national day of protest. No more sitting around yelling at the TV screen when Obama's Press Secretary pretends like we should have any sort of confidence whatsoever in Geithner as Treasury Secretary. Enough is enough, it's time to take back the economy!
Press Secretary Robert Gibbs is holding a live press conference on the AIG bailouts. Here are the biggest points so far:
The administration has complete confidence in Geithner. Gibbs indicated that Geithner has spent months looking into all available means to block these bonuses.
The Obama administration is open to congressional laws requiring a 100% surtax on the bonuses.
The new, $30 billion AIG bailout has not been released yet.
I am glad to hear this, especially the second and third points. However, there is still a big question to be answered:
If Geithner knew about the bonuses for months, and was working on trying to stop them, why didn't he tell the public? Knowledge of these bonuses would have reduced support for the releasing of the second $350 billion in TARP funds, and also increased support for the TARP Reform Act that passed the House but was not acted upon in the Senate. Burying this info played a huge role in the January passage of TARP that included no additional legal restrictions on the money. But Geithner sat on the story.
That is still grounds to fire Geithner. As far as major congressional votes go, this is akin to not telling the public that Iraq didn't have 0WMDs (it is not quite as bad, but it is close). He sat on information that could have swung one of the three most important congressional votes of the last two years. That is unacceptable. Fire Geithner.
In the extended entry, I provide a lengthy, detailed timeline of AIG bailouts and bonuses, from September 2008 through the present. The timeline includes the role Timothy Geithner and Larry Summers played in those bailout and bonuses. It shows that, more than any other government employee, Timothy Geithner is responsible for the bonuses at AIG. Larry Summers provided Geithner with assistance in this matter, but overall the blame almost entirely rests on Geithner himself.
In response to this scandal, it is time for President Obama to demand Timothy Geithner's resignation. The timeline in the extended entry explains why. Not only is Geithner the person responsible, but it would demonstrate that President Obama is deadly serious about reform in the financial services industry.
Please read the timeline in the extended entry. I would love your feedback on it.
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